On the Horns of a Dilemma in Durham

Aging temporary classrooms at Carrington Middle School in Durham are signs, local officals say, that new taxes are needed to pay for capital improvements.

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Paul Luebke is feeling both peeved and proud. For the past two months, the five-term state House member from Durham has been at the center of a debate over taxes in the Bull City. City and county leaders are looking for ways to pay for new schools, libraries, a downtown theater and other big-ticket projects without raising property taxes. Luebke, a longtime proponent of a more progressive tax system, is happy the issue is getting some attention. But he's dug in his heels against the preferred local strategy: asking the state legislature to approve a 1 percent tax on restaurant meals in Durham and an increase of one cent in the sales tax on all items except food.

Opposition from one member of Durham's legislative delegation usually dooms local bills. But this time, things might not be so clear-cut. While none of Luebke's colleagues have said they definitely prefer an increase in the sales tax or a meals tax to raising property taxes, several--like state Sen. Wib Gulley--have made it clear they're open to granting local officials more financing options.

For Luebke, the central issue is equity, and retail sales and meals taxes fall most heavily on those with lower incomes.

"I see my job as acting on behalf of the middle- and low-income majority," he says. "For the majority, raising a sales tax or an across-the-board meals tax is not good public policy. Every economist or sociologist who has written on taxes will say that a property tax, properly administered, is more fair."

Concerns over fairness have been the main reason Durham's legislative leaders have historically opposed new sales and meals taxes for the city and county. But Durham's property tax rates are now among the highest in the Triangle: 92.97 cents per $100 of assessed valuation. By comparison, the Wake County rate is 56 cents.

Because of this, local officials say they can't afford to be quite so principled. "In the abstract, all of us dislike regressive taxes," says Durham Mayor Nick Tennyson, who has proposed using meals tax revenues to pay for a planned 5,000-seat theater downtown. "When it comes time to figure out how to do various projects and we have a range of options, then we can have a choice. I think we often find less than perfect answers."

Durham isn't the only Triangle community looking to raise new taxes. Wake County leaders are seeking legislative approval for a referendum on a 1-cent local sales tax to help pay for new residential growth, something they've lobbied for unsuccessfully in the past. Wake already has a 1 percent tax on prepared meals.

Ron Aycock, executive director of the North Carolina Association of County Commissioners, says his organization is pushing for a statewide bill that would allow local governments to choose their own mix of revenue-raising alternatives, including taxes on land transfers, retail sales, prepared meals, hotel occupancies and impact fees on new development. Among the counties that have already won authorization for new local taxes is Mecklenburg, which uses a 1/2-cent sales tax to fund transportation needs. In the Triangle, Orange and Chatham counties are using revenues from impact fees on new developments to pay for new schools.

What's wrong with raising property taxes, a revenue source that local governments already have the power to tap? Aycock says it's a hard sell politically.

"The property tax in North Carolina, when compared to other states, is not as high as some," he notes. "But try telling residents in Durham: 'Your taxes need to go up because they pay more in Los Angeles.'"

There are also some aspects of the property tax that can be viewed as regressive, Aycock says. For example, elderly citizens on fixed incomes may have a hard time paying higher rates. Also, some industrial properties, such as those located in Research Triangle Park, are exempt from property taxes, as are large nonprofits like Duke University.

"When you have a property tax base that's constricted like that, the impact of an increase will be felt on those who are still part of the tax base--the homeowners," Aycock says.

Durham officials haven't been quite as sophisticated in the rationale they've presented to state representatives. Their main selling point for added sales and meals taxes is that they are spread more broadly across the local economy than property taxes, making the dent in individual pocketbooks relatively small.

In their public presentations, city and county leaders also argue that much of the income from sales and meals taxes would come from shoppers who live outside of Durham--although they offer no numbers to buttress the point.

In the case of sales taxes alone, county leaders expect to raise $11 million in 2001-2002. That works out to $54 for every man, woman and child in Durham county. When Durham officials met with local legislators over breakfast last month, they paid lip service to concerns about "regressivity" and "fairness" when considering how to raise revenues for the county's $534 million capital improvement plan for schools, libraries and a new human services complex. But their preference for hiking the sales tax was made clear in a slide presentation, which showed that property tax rates would have to be raised 12 cents over the next ten years, versus 3 cents if the sales tax were also increased by one cent.

County leaders have lowered the property tax rate by 3 cents in the past three years. So why are they now looking elsewhere for revenues?

Durham County Board of Commissioners Chair MaryAnn Black says the previous reductions we're made because "we're in a climate calling for tax reductions. Also, we didn't have our capital improvement plan in place" detailing new needs.

Others say it's a question of staying competitive. "We don't have as much diversity in our revenue sources," says Commissioner Ellen Reckhow. "Orange County is using impact fees for schools. Wake County has a prepared food tax. People do compare property taxes and right now, we don't compare favorably."

Although county leaders have expressed support for impact fees, many in Durham's business community are leery that such fees will drive away the very type of development that's needed to expand the local property tax base.

"The lack of expansion of the non-residential tax base has put us in the bind we're in," says Patrick Byker, head of the Friends of Durham, a business-oriented political action group. "Those fees should not be increased to the point that commercial development won't come to Durham."

Luebke, for one, doesn't buy that line of thinking. Local officials shouldn't be approving new development if they can't pay for the expanded services that growth demands, he says. Impact fees are designed to pay for needs created by development, not for long-standing problems, but if Durham leaders don't want to raise property taxes, Luebke says he'll support new impact fees or a luxury meals tax on high-end restaurants to raise needed revenues.

Because of Luebke's opposition to their initial proposals, county leaders are now "refining the legislative package," in Reckhow's words, and looking more closely at impact fees. A follow-up meeting between local officials and Durham's legislative delegation will take place early next month.

At least one member of that delegation, state House member Mickey Michaux, says he'll work for a statewide bill granting local governments the power to levy a mix of taxes with voter approval. Such a bill wouldn't require the unanimous backing of the delegation, meaning Luebke's opposition to specific taxes would carry less weight.

City leaders, meanwhile, are considering bumping up existing impact fees for widening roads, installing turn lanes and other street improvements. Durham has been collecting such fees from developers since 1989. A citizens committee has also been formed to help review the city's budget and, as Tennyson described their charge, raise questions overlooked by politicians.

One member of that committee, Mike Shiflett, says when it comes to tax options, a focus on fairness is the right one for Durham citizens.

"Adding money to the sales tax is the easiest way to solve our revenue problem but not the fairest," says Shiflett, a former city council candidate and president of the Watts Hospital-Hillandale Neighborhood Association. "Raising property valuation is another easy way to get money, but it's not the fairest. All of this new growth comes at a cost and now the bills are due. Usually it's the citizens of Durham who have to pay. My feeling is, why don't we share that burden of growth with the developers?"